Clarity and Conciseness of Financial Narrative Disclosures: Does the Practice Statement Matter?

Abstract

The International Accounting Standards Board has issued the exposure draft Management Commentary ED 2021/6 towards a revised Practice Statement, targeting deficiencies in narrative reporting practices. However, the work process remains on hold. Within this exposure draft, question 11a addresses the need for clarity (using plain language, avoiding jargon, and excessive technical terms) and conciseness (minimizing unnecessary repetition) in management commentary. We investigate whether the implementation of International Financial Reporting Standards (IFRS) influences the clarity and conciseness of management commentary, employing a new multidimensional complexity measure aligned with the ‘clear and concise’ criteria outlined in question 11a of the exposure draft. Our analysis reveals a decline in the clarity and conciseness of narratives when firms adopt IFRS, offering insights that directly address question 11a of the exposure draft. These findings support the proposals outlined in chapter 13 of the exposure draft and advocate for a metric-based approach consistent with the objectives of providing well-structured guidelines to enhance the preparation of management commentary. Furthermore, this research contributes to the broader domain of disclosure quality by focusing on narrative complexity.